Less than a third of American adults have their estate in proper order, with a plan in place to ensure that should anything happen, their family can rest assured that a major source of stress and strife has been eliminated. The misconception that estate planning is only for the old and wealthy needs to be thoroughly debunked – estate planning is often simple, inexpensive, and requires only a minor investment in time and attention.
Most estates require only a rudimentary estate plan to cover the basics. Some people may benefit greatly from a number of other estate planning considerations that are often overlooked at first glance, such as healthcare directives and living wills.
Yet there are some estates that are complex and large enough to warrant a larger and more comprehensive estate plan – often one that includes a form of trust. While largely misunderstood, a trust is simply an agreement to hold wealth in the name of the trust’s grantor, through the trustee, for a third party (the beneficiary). Trusts come in different shapes and forms to conform to different needs, but all trusts essentially involve the transfer of wealth, as an alternative to a will, sale, or regular gifting process.
In the state of California, trusts can help individuals with large and/or complex estates better manage how their wealth will pass on to their family after they pass away.
Living Trust Basics
As mentioned previously, a trust is little more than an agreement with a formal document describing the parameters of said trust. To create a trust, all you have to do is draft a trust document, have the respective parties sign it with witnesses present, notarize the document, and ensure that any paperwork you have describing ownership over properties and assets is properly amended to reflect the trust’s contents. That last part is the most important one. In short, it’s wise to have a properly-drafted living trust in California. This entails:
- Writing the trust document.
- Listing the contents of the trust.
- Making note of the trusts’ grantor (you), trustee (the trust’s manager), and beneficiary or beneficiaries.
- Notarizing the trust document, after it has been signed and completed.
- Properly funding the trust.
To fund a trust, you amend the ownership documents for a property or asset by changing the name of the owner from your name over to the name of the trust. For example, if you are one Mr. John Doe, then you would most likely amend the deed to a property you have funded into your trust with “The Living Trust of Mr. John Doe”.
Another reason to thoroughly go over any ownership documents is to avoid confusing estate issues. For example – you can fund any asset you wholly own into a trust. You can also fund your portion of a property into a trust if you co-own said property as tenancy in common or joint tenancy.
However, things change if you’ve listed a beneficiary. Some property, within state limitations, can be transferred outside of probate through the transfer-upon-death deed. In California, a transfer-upon-death deed is only valid for property that is:
- A single-family home or condominium unit.
- A single-family residence on agricultural property of 40 ac. or less.
- A residence with no more than four residential dwelling units (an apartment building, for example).
This essentially makes a property pass through to a loved one if you’ve listed them as beneficiary, upon your death. This can be done for accounts as well, especially life insurance, retirement accounts, and certain bank accounts. Because this is much simpler and cheaper than a living trust, it is generally recommended to omit any assets or accounts from a trust that you could otherwise pass onto beneficiaries.
There are cases where a trust is still recommended, however. If for some reason you wish to manage your beneficiary’s ownership over an asset through a trustee when you pass away, or if you wish to withhold most of an account’s value until a specific time, or provisionally distribute (i.e. drip feed) an account to a beneficiary for tax purposes, a trust is still your best option. But if you simply want a normal transfer of wealth and property, keep in mind what kinds of property, and accounts you can transfer without a trust.
Outside of a normal revocable living trust, other trust types that can be used to transfer wealth include:
- Minor’s Trust
- Charitable Trust
- Asset Protection Trust
- Special Needs Trust
- Spendthrift Trust
- Constructive Trust
Trusts do not intrinsically offer any tax benefits. The purpose of a trust is to offer you a greater level of control over how your assets will transfer over to the next generation, while avoiding the complications and inconveniences of the probate process. There are ways to make a trust to specifically lower tax costs. Though, it is crucial to discuss these matters with a tax attorney and estate planning professional to ensure that this is an option you want to explore in the first place.
You Will Still Need a Will
A living trust is not meant to replace a will. It does essentially do what a will does but better – however, having a will still allows you to enjoy the best of both worlds. Wills can appoint guardians for any minor children you may leave behind. A will can also be used to ensure that if any property was not added to your trust before you passed away, said property would automatically move into your living trust.
This type of will, also known as a pour-over will, is especially important if you plan to continue to amass assets and property.
Other Estate Planning Considerations
Estate planning is, interestingly enough, about more than just your estate. Certain estate planning tools to consider in any case include:
- Durable Power of Attorney – both a medical and financial power of attorney can ensure that if you are incapacitated or unable to communicate, someone can definitively represent you and your will.
- Living Will – a living will is a document that describes what medical procedures you specifically wish to abstain from, and what medical procedures you might prefer if several options present themselves. This document is used to determine what to do if you are incapacitated.
- Pet Trust – separate from the usual living trust, a pet trust is simply a document that declares that you will dedicate a portion of your trust to the care of your pet after your passing, to ensure that they get a home and are financially taken care of until their death.